analyzes how compensation schemes change in reaction to anticipated bail-outs. If there is a risk-shifting problem, bail-out … becomes flatter and effort decreases. If both types of agency problems are present, a sufficiently large increase in bailout … perceptions makes it optimal for a welfare-maximizing regulator to impose caps on bank bonuses. In contrast, raising managers …

operations and as the firm approaches financial distress, the paper proposes a new compensation mechanism for senior managers … valuation discount. This will give managers an incentive to curb excessive risk-taking and in particular to steer the firm away …